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Using prizes to spur innovation

Prizes used to spark innovation are on the rise. Philanthropists—as well as players in the public and private sectors—must understand how to use them in the most effective way.

July 2009 | byJonathan Bays, Tony Goland, and Joe Newsum

The use of prizes by philanthropies and private businesses to encourage innovation and achieve social benefits is burgeoning. A McKinsey study of prizes worth more than $100,000 suggests that the aggregate value of such large awards has more than tripled over the past decade, to $375 million. Moreover, the role of prizes is changing: nearly 80 percent of those announced since 1991 have been designed to provide incentives for specific innovations rather than to reward excellence in general. An understanding of the characteristics of effective prizes and of how they are evolving would be useful for not only philanthropists but also public- and private-sector players hoping to harness their potential for innovation.

To learn how prizes are meeting the goals of the philanthropies that finance them—and how their effectiveness might be improved—we studied 219 prizes, each with a value of $100,000 or more; interviewed about 100 experts on innovation, prizes, and philanthropy; and surveyed the sponsors of 48 major awards. Further, we conducted in-depth interviews with the sponsors and administrators of 12 public, private, and philanthropic prizes that have particularly interesting strategies, designs, and management practices.1

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Using prizes to spur innovation

We found that prizes are growing sharply in size, number, and variety (Exhibit 1). Upward of 60 prizes in our database have debuted since 2000, representing $250 million in new prize money. Meanwhile, the goals of the prizes are changing: the traditional recognition of excellence is giving way to the promotion of specific innovations and novel ways of achieving certain objectives. Businesses and the “new philanthropists”—baby boomers, such as Richard Branson, who are now funneling a lot of money to achieve social goals—increasingly dominate the pool of sponsors, providing more than two-thirds of the prize capital since 2000. This shift in part explains the expansion of prizes in areas such as science, engineering, aviation, space, and the environment. By contrast, prizes related to the arts and humanities represented one-third of the total a decade ago but make up less than 10 percent today.

Exhibit 1

Philanthropic prizes have grown sharply in size, number, and variety since 2000.

When are prizes more effective than other kinds of philanthropic instruments? Our research suggests that three conditions are paramount: a clear objective (for example, one that is measurable and achievable within a reasonable time frame), the availability of a relatively large population of potential problem solvers, and a willingness on the part of participants to bear some of the costs and risks. Teams competing for the $10 million Ansari X PRIZE to develop spacecraft capable of entering space and returning safely twice within ten days, for instance, spent more than $100 million in the pursuit.

If one or more of these conditions can’t be met, potential prize givers should consider alternatives such as grants or a combination of prizes and other instruments (Exhibit 2). Indeed, some prize sponsors have adopted a portfolio approach to social change. The Mo Ibrahim Foundation, for instance, offers a $5 million prize for a retired head of state who provided effective leadership in Africa and publishes a quantitative index of African governance. The index builds on the publicity generated by the prize to start a wider debate about the importance of good governance—a debate intended to prompt important changes in public attitudes as much as individual behavior.

Exhibit 2

Prizes are effective philanthropic tools when three conditions are met; otherwise, alternatives should be considered.

In attempting to match the structure of a prize to the problem at hand, the organizations we studied used one of six types of approaches (see sidebar, “The six archetypes”). Some are familiar, such as exemplar prizes that identify excellence in a field or point-solution prizes that reward specific outcomes. Others are less well known but equally effective. Sponsors wishing to strengthen the performance of a particular community, for example, might consider a network prize, like El Pomar Foundation’s Awards for Excellence, which recognize high-performing Colorado nonprofits, build connections among them, and link winners to potential funders. A market stimulation prize can spark innovation in a new or stalled market. Since SpaceShipOne took the Ansari X PRIZE in 2004, public and private investors have spent more than $1.5 billion to develop this nascent industry.

Large cash awards, however, are not prerequisites for success. Ashoka’s Changemakers competitions, a suite of contests to identify solutions for a variety of social problems, encourage competitors to collaborate by sharing ideas in an online forum before the winners are announced. Purses are intentionally set low, at $5,000, so that the money at stake doesn’t discourage collaboration. The bigger payoff comes when potential funders see strong ideas emerging from the process.

Our research also revealed a critical (and often neglected) area in the development of prizes—measuring their impact and making appropriate changes in response. An organization sponsoring a prize aiming to strengthen a particular community, for example, could periodically examine collaborative projects resulting from the new networks created. But in our survey of prize administrators, only 23 percent of them annually evaluated the impact of their prizes. Sponsors should regularly appraise prizes by measuring their impact and revise them when they fall short of meeting the broader goal, whether it’s generating investments for a winning proposal or sustaining a newly created community of participants.

Ultimately, the ability of prizes to mobilize participants and capital, spread the burden of risk, and set a problem-solving agenda makes them a powerful instrument of change. They offer a valuable form of leverage to sponsors that use them as part of a well-designed strategy.

About the authors

Jonathan Bays is a consultant in McKinsey’s New York office; Tony Goland is a director in the Washington, DC, office; and Joe Newsum is a consultant in the Seattle office.

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The material on this page draws on the research and experience of McKinsey consultants and other sources. To learn more about our expertise, please visit the Social Sector Practice.